9 commonly committed financial planning blunders

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Written by PolicyBazaar

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Updated date : 14 July 2016

It is rightly said that failing to plan is planning to fail. This especially holds for those trying to make headway into achieving financial fitness. If you find yourself grappling for answers when asked about your financial planning roadmap, it’s time to take note.

Here are some common financial planning mistakes people commit, that you should not:

1. Starting Late

The biggest financial planning blunder is to start planning and saving/investing at a later age. It is wise to start planning finances early because if you begin saving when you are younger, even smaller amounts ultimately lead to higher savings due to the compounding effect therein. However, if you start planning finances after the age of 30 or 40, the amount you need to save only keeps mounting. Also, it is vital to make investments under a financial expert’s guidance, as wrong investments are a financial stalemate.

Starting early is good but aggressive saving is not - Starting late is not recommended but neither is being over cautious. The key is to strike the right balance after weighing all factors and then taking the path best suited towards prudent financial savings.

2. Careless Spending

Stress, financial independence, and a general careless/impulsive attitude towards money are some factors leading people towards spending impulsively and carelessly. Hence, people often find their bills, especially their credit card dues, going through the roof. Spending first and thinking about saving later is a mistake people often commit - the rich and wise do the exact opposite.

3. Making Light of Inflation

Disregarding inflation in the financial planning process is another major financial planning blunder. Consequently, even retirement plans get negatively impacted because of people’s inability to foresee and consider the relevant factors in future.

Sometimes, the rate of inflation outdoes the return on investment rate. Hence, even though a person may earn interest, in effect, the actual profits turn out to be negative. Making light of inflation could lead to slow but steady erosion of savings, making one land up in a financial chafe.

4. Investing in Property at a Young Age

Investing in property at a very early age is a predominant practice in India. Quite often, this decision is tied to sentiments rather than being a pressing need. Marriage is closely followed by the need to own a home, stemming from family/peer pressure or simply due to an aversion to pay rent. This scenario combined with skyrocketing property prices lands up most youngsters in the home loan web. As a result, almost 30-40% of the net monthly income goes towards home loan EMIs, putting extreme strain on finances. Another problem this creates is that retirement planning is postponed – a critical life aspect one should definitely plan ahead for.

5. Investment and Life Insurance – Mixing Them Up

Mixing up investment and life insurance is a financial planning mistake, as both serve different purposes. While investment aims at growing wealth, insurance aims at safeguarding it. In India, most people purchase life insurance primarily for tax saving purposes, without fully comprehending the benefits, features, tenure, etc.

Life insurance is a commitment for the long term - the‘need’ to buy life insurance and its real advantages should outweigh its tax benefits. Examples of plans that combine investment and insurance are traditional plans like endowment, whole-life and money back policies.

6. Not Having a Contingency Fund

Loss of job/business, losses due to natural calamity, medical emergency – all are unpredictable financial contingencies and it is imperative to be prepared financially to deal with them. People often break/withdraw their Public Provident Fund (PPF), cash reserves, fixed deposits etc. to fund immediate needs. This is a financial planning blunder. It is important to have sufficient liquid cash/bank balance as a contingency fund. If you do not have such an emergency fund, begin with a recurring deposit account or use your sweep-in account to create the same.

7. Having Insufficient Health Insurance Coverage

Living in an age of burgeoning medical inflation combined with unhealthy lifestyles, relying solely on medical coverage provided by employers is a big financial planning mistake. If a person loses his job, or the employer alters the Employees Mediclaim policy’s terms and conditions, a difficult situation arises. Not having a standalone health insurance policy for oneself and one’s dependents puts the entire family at risk, and this is one blunder you must avoid at all cost.

8. Not Creating a Diversified Investment Portfolio

Many people commit the mistake of not investing and diversifying across varied asset classes. It is necessary to invest in equity related instruments to generate long-term wealth. It makes sense to invest at least some portion of savings in the right equity/equity-related mutual funds. However, this should be done after a thorough understanding and assessment of the risks associated with each asset class. Financial literacy is the key.

9. Not Setting Financial Goals

Rather than trying to time financial markets, it is wiser to begin with identify and setting definitefinancial goals – be it for property, marriage, travel, retirement, child’s education/marriage. Doing so will offer maximum clarity about investment requirements and help plan accordingly. It is imperative to take financial planning very seriously and not procrastinate investing for defined financial goals.

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